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Financial Statement Analysis

Submitted to:
Mrs. S.Sudha
Faculty of Financial Management, Indian Institute of
Plantation Management, Bangalore

Presented By:
Prit Ranjan Jha
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Notes
• All amounts worked here are in terms of
Rupees in Crores (1 crore
=10000000=10^7).
• MS Excel sheet has been used for
computing the ratios.

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I Liquidity Ratios
Year 2007
1 Current ratio: Current assets / Current Liabilities
II.3:Current assets,Loans and advances 6289.72
II.4:Current liabilities and provisions 3857.59
(II.3/II.4) 1.630479133
The current ratio of 1.63 times says that the company is in
relatively good short-term financial standings.

The ratio is an indication of a company's ability to meet short-


term debt obligations; the higher the ratio, the more liquid the
company is.

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I Liquidity Ratios
Year 2007
2 Quick ratio or Acid test ratio: (Current assets-
inventories)/ Current Liabilities
II.3:(Current assets,Loans and advances) 6289.72
Less:II.3a:Inventories 3354.03
2935.69
II.4:Current liabilities and provisions 3857.59
(II.3-II.3a)/(II.4) 0.761016593
The small ‘Quick ratio’, i.e. 0.76 times says that the company's
financial strength is not so strong. In general, a quick ratio of 1
or more is accepted by most creditors; however, quick ratios
vary greatly from industry to industry and ITC does not have as
such any worries in getting creditors.
ITC has strong financial positions in many other aspects.
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I Liquidity Ratios

Year 2007
3 Cash ratio or Absolute liquidity ratio: (Cash
+Marketable securities)/Current liabilities
II.3c:Cash and bank Balances 900.16
Add:Marketable securites 0
900.16
II.4:Current liabilities and provisions 3857.59
(II.3c)/(II.4) 0.233347764
The cash ratio of 0.23 times says that the company is
not in the position to very quickly liquidate its assets and
cover short-term liabilities. But there is no such liquidity
need for the company and so the small value of the ratio
has no such important implications. (The ratio is of
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interest to short-term creditors)
II Solvency Ratios
Year 2007
1 Debt – equity ratio: Long term debt/ equity (net
worth)
I.2:Loan funds 200.88
I.1:Shareholders funds 10437.08
(I.2)/(I.1) 0.019246763

The ratio of 0.02 times, which means that the


company has not been aggressive in financing its
growth with debt. Thus its earnings are stable. The
company has better support from the shareholders.

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II Solvency Ratios
Year 2007
2 Debt ratio: debt (long term)/ (debt (long term) +
equity) or debt/capital employed
I.2:Loan funds 200.88
I.1:Shareholders funds 10437.08
(I.2)+(I.1) 10637.96
(I.2)/(I.2+I.1) 0.01888332
The ratio of 0.02 times signifies that the company
has employed more capitals over its debts. Thus the
company is efficiently utilizing its loan funds.

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II Solvency Ratios
Year 2007
3 Interest Coverage ratio : (earnings before interest
and tax) / Interest
P/L:III:profit before taxation and exceptional items3926.7
II.4a-13:Interest accrued but not due on loans 0.55
(P.III)/(II.4a-13) 7139.454545
The ratio of 7139.4 times is magnificently very high
and hence the company has very sound financial
position. It has no tension of paying interests over its
loans.

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III Turnover Ratios
Year 2007
1 Inventory turnover: Cost of goods sold or net
sales/Average (or closing) inventory.

P/L:IB:Net sales 7135.75


II.3a:Inventories 3354.03
(P/L:IB)/(II.3a:) 2.127515258
The ratio of 2.13 times signifies that the company is
efficient in selling its stocks.

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III Turnover Ratios
Year 2007
2 Days of Inventory holding: Number of days in the
year (say 360)/ Inventory turnover ratio.
Number of days in a year 360
Inventories turnover ratios 2.127
(360)/(ITR) 169.2524683
169 days or about five and half months periods for
the liquidation of stocks is quiet efficient.

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III Turnover Ratios
Year 2007
3 Debtors turnover ratio: Credit sales or net sales/
Average (or closing) debtors (or accounts
receivable (total debtors +bills receivable)

P/L:IB:Net sales 7135.75


II.3b:Sundry debtors 636.69
(P/L:IB)/(II.3b) 11.20757354
The ratio of 11.2 times signifies that the company
is getting good returns and has no visible risk but
benefits out of its debtors.
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III Turnover Ratios
Year 2007
4 Collection period: Number of days in the year
(say 360)/ Debtors turnover
Number of days in the year 360
Debtors turnover 11.207
(360)/(DTR) 32.12278041
The debt collection period of 32 days is quiet good
and the company is efficient in getting back its dues.

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III Turnover Ratios
Year 2007
5 Current assets turnover: Net sales/ Current assets

P/L:IB:Net sales 7135.75


II.3: Current assets,loans and advances 6289.72
(P/L:IB)/(II.3) 1.134509962
The ratio of 1.13 times signifies that , in spite of the
current liabilities, the company is efficient in making
sales revenue.

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III Turnover Ratios
Year 2007
6 Net current assets turnover: Net sales/ Net current
assets
P/L:IB:Net sales 7135.75
Net Current Assets 2432.13
(P/L:IB)/(NCA) 2.933950899

The ratio of 2.93 times signifies that the company is


highly efficient in utilizing its net current assets and
generating sales revenue.

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III Turnover Ratios
Year 2007
7 Fixed assets turnover: Net sales/ Net fixed assets
P/L:IB:Net sales 7135.75
II.1:Net Fixed Assets 5610.91
(P/L:IB)/(II.1) 1.271763404

The ratio of 1.27 times signifies that the company is


very efficiently utilizing its fixed assets for generating
sales revenue.

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III Turnover Ratios
Year 2007
8 Net assets turnover: Net sales/ Net assets or
capital employed : (Net assets = all assets –
accumulated depreciation)
P/L:IB:Net sales 7135.75
II.1:Net Fixed Assets 5610.91
II.2: Investments 3067.77
Net Current assets 2432.13
Net assets 11110.81
(P/L:IB)/(NA) 0.642234905
The ratio of 0.64 times signifies that the company has still to
be more efficient in utilizing its net assets in generating sales
revenue.
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IV Profitability Ratios
Year 2007
1 Margin: (Profit before interest and tax (PBIT)/ Net
sales)×100
P/L:III:Profit before taxation and Exceptional items 3926.7
P/L:IB:Net Sales 7135.75
(P/L:III)/(P/L:IB)×100 55.02855341

The Profit margin of 55.03% is quiet impressive and


the company is making good profits.

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IV Profitability Ratios
Year 2007
2 Net margin: Profit after tax (PAT) ×100 / Net sales

P/L:III:Profit after taxation 2699.97


P/L:IB:Net Sales 7135.75
(P/L:III)/(P/L:IB)×100 37.83722804
The net margin of 37.83% is quiet impressive, and the
company is performing well.

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IV Profitability Ratios
Year 2007
3 Before tax return on investment: (PBIT/Net
assets) ×100
P/L:III:Profit before taxation and Exceptional items 3926.7
II.1:Net Fixed Assets 5610.91
II.2:Investments 3067.77
Net Current assets 2432.13
Net assets 11110.81
(P/L:III)/(NA)×100 35.34125775

The Return of 35.34% is quiet good and company is


performing well.
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IV Profitability Ratios
Year 2007
4 Return on equity: (PAT/Equity (net worth)) ×100
P/L:III:Profit after taxation 2699.97
I.1:Shareholders funds 10437.08
(P/L:III)/(P/L:IB)×100 25.869017

The ratio of 25.86% is quiet good and the company


is utilizing the shareholders funds in a better way.

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V Equity-related Ratios
Year 2007
1 Earning per share (EPS): PAT/Number of
ordinary shares
P/L:III:Profit after taxation 2699.97
P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907
(P/L:III)/(P/L:IV)(×10^7: to convert in per rupee) 7.185287102

In comparison to the face value of Re.1/share the EPS


of Rs.7.18 is very good.

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V Equity-related Ratios
Year 2007
2 Dividends per share (DPS): Dividends/ Number of
ordinary shares
P/L:IV:Proposed Dividend 1166.29
P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907
(P/L:III)/(P/L:IV)×10^7(to convert into unit ruppes) 3.10378578
Dividend per share (DPS) is a simple and intuitive
number. It is the amount of the dividend that
shareholders have (or will) receive, over an year, for
each share they own.
In compared to the face value of the shares, i.e.
Re.1.00/share. DPS of Rs.3.10 is quiet good.
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V Equity-related Ratios
Year 2007
3 Pay out ratios: DPS/EPS or Dividends/PAT
DPS 3.1
EPS 7.19
(DPS)/(EPS) 0.431154381
a very low payout ratio indicates that a company is
primarily focused on retaining its earnings rather
than paying out dividends.
The payout ratio also indicates how well earnings
support the dividend payments: the lower the ratio, the
more secure the dividend because smaller dividends are
easier to pay out than larger dividends.
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So the value of 0.43 times is quiet good.
V Equity-related Ratios
Year 2007
4 Dividend Yield: DPS/Market value per share

We have to get the Market value per share of the relevant


period .

Market Price Per Share


The closing price of the common or preferred stock as
reported on the applicable stock exchange consolidated
tape as of the date indicated

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V Equity-related Ratios
Year 2007
5 Price/Earning ratio: Market value per share/ EPS

We have to get the Market value per share of the relevant


period .

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V Equity-related Ratios
Year 2007
6 Earning Yield: EPS/ Market value per share

We have to get the Market value per share of the relevant


period .

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V Equity-related Ratios
Year 2007
7 Book value per share: Net worth/ Number of
ordinary shares
I.1:Shareholders funds 10437.08
P/L:IV-19(iv):Weighted average Number of ordinary shares outstanding 3757636907
(I.1)/(P/L:IV)×10^7(to convert into unit ruppes) 27.77564799
BV is considered to be the accounting value of each
share, drastically different than what the market is
valuing the stock at. The book value, i.e. Rs.27.77 is far
higher than the face value of each share, i.e. Re.1.00.
“Here “diluted” value in considering numbers of shares is
not considered.”
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VI Investment-related Ratios
Year 2007
1 Return on assets or earning power (ROA): (PAT/ Average
total assets (of the given years, here 2006&07)) ×100 or
((PAT+ Interest)/Average fixed assets) ×100
P/L:III:Profit after taxation 2699.97
Fixed assets 2007 5610.91
Investments 2007 3067.77
Current assets 2007 6289.72
Fixed assets 2006 4405.13
Investments 2006 3517.01
Current assets 2006 5161.9
Average total assets 14026.22
(PAT/ATA)×100 19.24944853
Earning power of the company, i.e. 19.25% is quiet good and the
company is doing well.
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VI Investment-related Ratios
Year 2007
2 Return on capital employed (ROCE):
(EBIT(PBIT)/ Capital employed) ×100
P/L:III:Profit before taxation and Exceptional items 3926.7
I:Sources of Funds 11110.81
((P/L:III)/I)×100 35.34125775
The ROCE of 35.34% signifies that the company is
getting good return out of its investment decisions.

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VII Return on Equity (ROE)
Year 2007
1 ROTSE (return on total shareholders equity):
(PAT/ Total shareholders equity) ×100
P/L:III:Profit after taxation 2699.97
I.1:Shareholders funds 10437.08
(P/L:III)/(P/L:IB)×100 25.869017
The ratio (25.87 times) is same as that of “Return on
equity”, since there are no preference shares.

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VII Return on Equity (ROE)
Year 2007
2 ROOSE (return on ordinary shareholders equity) /
RONW (return on net worth): ((PAT-preferential
dividends)/Net worth) ×100
P/L:III:Profit after taxation 2699.97
I.1:Shareholders funds 10437.08
(P/L:III)/(P/L:IB)×100 25.869017
The ratio (25.87 times) is same as that of “Return on
equity”, and “return on total shareholders equity” since
there are no preference shares.

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Du Pont Analysis

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Du Pont analysis for year 2007:

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Du Pont analysis for year 2006

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Du Pont analysis for year 2005:

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Du Pont analysis for year 2004:

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Du Pont Analysis

30.00 28.55
Return on total assets (%)

25.00 22.44 23.37 22.69

20.00

15.00

10.00

5.00

0.00
1 2 3 4
Years:1~2004:2~2005:3~2006:4~2007

Du Pont chart portrays the earning power of a firm. The ROA ratio is a central
measure of the overall profitability and operational efficiency of a firm it shows the
interaction of Profitability and activity Ratios, It implies that the performance of a firm
can be improved either by generating more sales volume per rupee of investment or
by increasing the profit margin per rupee of sales.
So as per the analysis, the company has to maintain more consistent and increasing
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trend in its ROA in the following years.
References
• Class notes of Sudha madam, books from
the liabrary of IIPM.
• http://
www.investopedia.com/terms/d/debtequityratio
• http://
www.icmrindia.org/casestudies/icmr_case_stu
• http://www.econ.uconn.edu/
• http://www.morningstar.com

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